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The Best International Index Funds for Smart Investors

If you want international stock exposure, these funds are your best bets.

Index funds have been around for more than 40 years, and they revolutionized the way that ordinary people invest. By making it affordable for investors to get diversified exposure to the stock market, index funds opened the door to what had been an exclusive province of the rich. Over time, index funds evolved to allow investors to broaden their investing horizons, and international index funds in particular offer a chance to invest around the world. Below, we'll look at five international index funds that are among the best at what they do.

Working the low-cost angle

All five of the international index funds above have one thing in common: Their costs are among the lowest in the business. Some of the largest and mostly heavily traded international index funds have higher expense ratios, even though their portfolios in many cases closely mimic what you'll find in the funds above.

The three Vanguard funds listed above are just a few of its extensive suite of index funds related to the international investing realm. The ticker symbols refer to the exchange-traded fund versions of these funds, but Vanguard also offers traditional mutual fund offerings in each of the three. With two of them -- the emerging market and developed market options -- the expense ratios for the Admiral class of mutual fund shares is exactly the same as the low-cost ETF option. For the small-cap international fund, however, Vanguard doesn't offer an Admiral class of shares, and the investor class has an expense ratio of 0.31% -- almost double the ETF's costs.

Schwab, on the other hand, doesn't have the same sort of setup that Vanguard uses, as its ETFs are distinctly separate entities from its index funds. The two Schwab ETFs listed above cover the bulk of the international investing universe, and it also has a small-cap international index fund that matches up well with Vanguard's offering.

Paying attention to liquidity

The expense ratio of an index fund is the first place that most investors look to assess costs. However, another key aspect of efficiency for exchange-traded funds involves how easy it is to buy and sell shares in a liquid market. With traditional mutual funds, investors can make purchases or sales at any time of day, confident in getting the closing net asset value at the market close. With ETFs, however, the ability to trade throughout the day introduces the potential added cost of the bid-ask spread every time you buy or sell shares.

Both Schwab and Vanguard have reasonably solid followings, and their volume is high enough to maintain a fairly regular $0.01 per share bid-ask spread in most cases. The only exception is with the small-cap oriented index funds, in which wider spreads often predominate. That shouldn't prevent you from using the ETFs as appropriate, but it does mean being more careful with trading and considering the traditional mutual fund version of these funds when available.

Be smart with your international exposure

Given the cost of trying to go directly to international markets to invest, many U.S. investors rely almost exclusively on index funds for their international stock exposure. By looking at these five low-cost alternatives, you can reduce the amount of drag on your performance that goes toward paying fees and expenses. That will let you keep as much of your hard-earned profits as possible while giving you market-matching performance in the international markets, and that can give you the diversification you'll need to enhance your returns over the long haul.

Author

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.
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